10 Tips for Saving Money When Buying a Home
Updated: Mar 8
Buying a home is a significant financial investment, and it's important to save as much money as possible during the process. In this article, we'll share 10 tips for saving money when buying a home.
Research, Research, Research
One of the best ways to save money when buying a home is to do your research beforehand. It's important to research the real estate market in the area you're interested in to get a sense of what the homes are selling for. This will help you avoid overpaying for a property.
You can also use online resources to find affordable homes that meet your criteria. Real estate websites and apps can be great tools for finding homes that fit your budget.
Additionally, it's important to research the neighborhood and its amenities. This can help you determine whether the location is right for you and whether it's worth the investment. here are some tips:
Use online real estate websites to find out what homes are available in your desired area.
Research the average sale price for homes in your desired area.
Research the current mortgage rates to get an idea of what you can afford.
Start saving for a down payment early
One of the biggest expenses when buying a home is the down payment. By starting to save early, you can build up a substantial down payment and reduce the amount you need to borrow. One strategy I've seen be successful is taking the money you are saving for a down payment and placing it within short-term CDs. This will help you make a little extra money while you are saving.
When buying a home you typically need 20% down. It may take some time to save up 20% but the benefits are pretty nice. You don't have to pay mortgage insurance or PMI which can increase your monthly mortgage payment. You will also have a smaller loan, which will also lower your monthly payment. While putting 20% down has benefits for many, getting into a home and paying down the mortgage may be worth the additional expense to others.
When I purchased my first home, I got an FHA loan, put no money down, and just ended up with a higher mortgage and PMI for a time. This was well worth is as I was early in my career, the market was trending up, and I didn't mind scraping by for a while.
Here are a few loan types that don't require 20% down:
FHA loans: These are loans backed by the Federal Housing Administration, which allows borrowers to make a down payment as low as 3.5%. However, borrowers are required to pay mortgage insurance premiums.
VA loans: These are loans guaranteed by the U.S. Department of Veterans Affairs, which offer eligible military service members, veterans, and their families the ability to purchase a home with no down payment.
USDA loans: These are loans guaranteed by the U.S. Department of Agriculture, which offer financing to eligible rural and suburban homebuyers with no down payment required.
Conventional loans with a lower down payment: Some conventional loans, such as those backed by Fannie Mae or Freddie Mac, may allow for a down payment as low as 3% or 5%.
Get pre-approved for a mortgage
Before you start looking for a home, it's a good idea to get pre-approved for a mortgage. This will give you an idea of how much you can afford to borrow and help you narrow down your search. It also gives the seller confidence that you are a qualified buyer. In a seller's market, as a buyer, you will have to move quickly, and being pre-approved can help greatly.
One of the most significant costs of buying a house is securing financing. Here are some tips on how to save money on financing:
Shop around for the best mortgage rates and terms.
Consider getting pre-approved for a mortgage to show sellers that you're serious about buying.
Look into government-backed loans that may offer lower interest rates or require lower down payments.
Shop around for a mortgage lender
Mortgage rates and fees can vary significantly from lender to lender, so it's important to shop around and compare offers. This can save you thousands of dollars over the life of your loan. In my experience I've found smaller, local banks have the best rates. I'd suggest starting there.
When I was looking for my first home I got a quote from 5 different sources. Three of those sources had the same rate, one was higher, and one was lower (it was a loan credit union). It was worth it for me to take 30 minutes to call around because I saved half a percent on my loan and thousands of dollars over the 5 years I lived in that home.
Consider a shorter loan term
While a longer loan term may result in lower monthly payments, it will also result in higher overall interest charges. Consider a shorter loan term, such as 15 years instead of 30 years, to save on interest. If you can afford the shorter term, it is always a money saver over time.
I have had both a 15 and 30-year mortgage before. They have their pros and cons. When you have a 15-year mortgage you are quickly paying down the debt, but your payment is higher. When inflation hit in 2022 I was kicking myself a little because I would have liked to have a little extra cash around to cover those costs. We made some adjustments to spending in other areas and were just fine, but having a lower mortgage payment would have been very nice at the time.
Make a higher down payment
A higher down payment can reduce the amount you need to borrow and result in lower monthly mortgage payments. It can also help you avoid paying private mortgage insurance (PMI), which is an extra fee required if you make a down payment of less than 20% of the home's value. If you are patiently waiting for just the right home, then this strategy will probably work best for you. Or, if you just prefer to have a smaller mortgage, then this is definitely for you.
This is particularly great if you are buying your second or third home. Typically in those instances, you are selling a previous home and have equity. As you are searching for your next home, you can select a price range that will allow you to pay a larger down payment and keep your mortgage costs lower over time.
Negotiate the price
Don't be afraid to negotiate the price of the home you want to buy. By getting a lower price, you can save money upfront and lower your monthly mortgage payments. This might be the hardest of all items on this list. Typically, when you find the home you want, that's the end of your search and you go all in. Keeping your options open when it comes to the home you want will help you execute on this strategy.
Having the right realtor can really help with this part of the process. Most realtors don't really make an effort to negotiate you a better price. As you are searching for the right realtor for you, make sure they are comfortable negotiating on your behalf. This should be something you ask them about as you are vetting a potential realtor.
Negotiating the purchase price can save you a significant amount of money. Here are some tips on how to negotiate effectively:
Have your real estate agent research comparable homes in the area to determine a fair price.
Make a lower offer and be prepared to negotiate.
Consider asking the seller to cover closing costs or make repairs.
Look for homes that need work
Homes that need repairs or renovations may be priced lower than move-in-ready homes. If you're handy or willing to put in some sweat equity, this can be a great way to save money on your home purchase. Also, if you are willing to live in a home that needs some work, you don't even need to be handy, just willing to pay someone else to get the work done and live in a home you know will be a construction zone from time to time. This worked quite well for my wife and I with our first home (and it brought us a TON of equity as well).